It sometimes seems as though the State of Israel inhaled something and woke up as the state of medical cannabis. More than 100 companies are currently active in this area, which only a few years ago was not even whispered of, but even if it looks that way, this industry did not spring up overnight but grew for years in the dark, chiefly in an overseas direction. The legalization of cannabis in several countries, the developing regulation of medical cannabis (in Israel too), and the opening of the local market to competition and expectations that the export market will be opened up as well have led to the current boiling point.

In the past five years, and particularly in the past two-three years, most of the attention has been on the companies in this field traded on the Tel Aviv Stock Exchange, twelve in number, but most of them are companies at the beginning of the road, and are focused on growing and processing the plant. There are also older agricultural and industrial companies, and technology companies. These develop cannabinoid-based drugs, delivery methods, technologies for improving plant growth, and so on. Even if cannabis exports are prohibited, these companies can export their know-how.

Israel is at a unique nexus thanks to its expertise in advanced agricultural technologies, in research on the effect of cannabis on the human body (a field defined and established by Prof. Raphael Mechoulam of Hebrew University, who in the course of his career trained dozens of researchers who followed in his path); and in drug delivery – an area that the Israeli pharmaceutical industry has specialized in because it requires shorter development times and more inter-disciplinary thought than classic pharmaceuticals. Another area that Israel specializes in is medical equipment.

With the aid of a survey by Cann10 of the Shizim group, in collaboration with Deloitte and crowdfunding platform OurCrowd carried out in advance of an international conference held two weeks ago, “Globes” presents here the areas of activity and the outstanding companies in the cannabis industry, and analyzes the forces at work in the market.

The growers: The market pioneers

Israel’s cannabis industry can be divided into several segments. The first is the growing companies. The leading company in this segment is Tikun Olam, the scope of whose activity was revealed in the press and media a week ago, after it emerged that it was a partner with several other companies around the world. One of them has already been sold for billions of dollars. Alongside Tikun Olam are the “eight pioneers” that received cannabis growing and marketing licenses before the government’s reform of the industry and have been active in the market for several years. Tikun Olam, the pioneer among pioneers, held 27% of the market and was the most prominent company in shaping the image of the market and its lobby, and in activity overseas. The remaining companies held 8-12% of the market each.

The best known are two companies that have linked up with public companies. One is BOL (Breath of Life) Pharma, which already produces its products, processes them in its own factory, and distributes them through pharmaceuticals company Rafa. BOL had 10% of the Israeli market before the reform. The second is Canndoc, which held 8% of the Israeli market before the reform. Both companies plan to storm the global market shortly, but at present neither of them has overseas activity.

Among the eight growers is also Seàch, which collaborates with Cann10. Seàch grows cannabis and produces extracts from it at the factory of Panaxia (which is described in more detail below), and Cann10 markets them for it.

Unlike, BOL, Canndoc and Seàch, Tikun Olam has as yet no GAP standard approval indicating that is products are produced in accordance with the Ministry of Health’s new standards, which came into force in April this year. It is working towards obtaining the standard for its new farm in Kfar Yehoshua. Earlier this month, the Ministry of Health shut down Tikun Olam’s farm in Biria, on the grounds that it did not meet ministry standards, but the company hopes that the farm will be restored to full activity shortly.

Other companies are Pharmocann, which makes medical cannabis products for cosmetic and dermatological use, and has started developing special compounds for products of this kind and to gear up for production of its cannabis strains in Australia; Better Cannabis; IMC (Israel Medical Cannabis); Teva Adir; and Cannabliss.

Support companies: Adapting technologies

According to a report compiled by IVC last February, there were 68 active companies in the Israeli cannabis market at that time, and they had raised $76 million between them – not a large amount in relation to the number of companies, indicating an industry just starting out. Although many financing deals in this industry go unreported, and many more companies than in the biomedical sector in general get underway without raising external capital, this is still an industry mostly at the seed stage, as it were.

The companies supporting medical cannabis growing divide into several sub-categories: special lighting for growing in hothouses; sensors for the plants; new fertilizing methods; home growing kits; and environmentally friendly pest extermination methods. Most of the companies in these categories are just at the beginning, and their chances of success are similar to those of any Israeli startup. Some of them, however, have a distinct advantage: they started out in traditional agriculture, and have accumulated proven know-how that can be applied to cannabis growing.

One such company is humidity control equipment company DryGair, which exemplifies very well the unexpected connections that can give birth to an Israeli startup. The company’s CEO since it was founded has been Adv. Rona Orlicky, daughter of Dr. David Cohen, one of the pioneers of energy exploration in Israel, and she is a partner in her father’s business activity, which includes the Leviathan and Tamar offshore gas discoveries. DryGair was founded on the basis of agricultural technology developed at the Volcani Agriculture Institute. Its main shareholder is Lod-based Misha Refrigeration, which has been active for 60 years in installation of air conditioners and cooling systems for large customers. The company has a German investor by the name of Antan Group, a family fund that puts an emphasis on environmentally beneficial investment.

Seedo Lab is an example of a company that has circumvented the export barrier. It has developed an appliance for growing cannabis at home. The appliance is not designed solely for cannabis, but practically no other plant would justify investing $2,400 in a domestic appliance aimed at people who don’t like gardening. Since it is not necessarily connected to cannabis, it can be exported to the US without any problem, and that is what the company does. Another company called Leaf has developed a similar appliance that can be operated using a smartphone, so that it also provides entertainment for the home grower.

Exporting know-how rather than cannabis

Three companies have so far completed construction of cannabis production facilities in Israel: Panaxia; Breath of Life Pharma; and Bazelet, which is still waiting for approval for its facility. These companies will presumably be the spearhead when the time comes for exports. Panaxia was a pioneer in this area, and as well as setting up its facility in Israel, it used its know-how to set up facilities in the US. The US does forbid cannabis imports, but know-how in the production process, from beginning to end, can be exported to it. Panaxia did so, and has been well rewarded. It has also set up a facility in South Africa.

Panaxia has used its pharmaceutical know-how to develop a range of cannabis products and production methods: pastilles for swallowing and for placing under the tongue, oils and essences, creams and patches, and even suppositories. The company’s delivery methods are patent-protected, and it plans to produce gels and a device for inhaling a product in powder form.

Panaxia does not grow cannabis itself, but since it has one of the few approved facilities in Israel, it collaborates with agricultural companies, among them Seàch, Pharmocann, Teva Adir, and Better Cannabis. Its products are marketed in Israel by Cann10 and Rafa. Together with its partners, it carries out clinical research to examine the use of its delivery methods for various diseases.

BOL has also built a manufacturing facility, which sells the products that the company develops. It is in fact the only company in Israel that covers the entire value chain. It recently received a loan of up to $30 million from Amir Marketing and Investments in Agriculture Ltd. and from Super-Pharm owner Leon Koffler, and as part of the deal announced its intention of operating overseas. It also disclosed its financials, showing that in 2016 its revenue totaled NIS 8.7 million, on which it earned a tiny profit of NIS 0.1 million. In 2017, still before the cannabis reform in Israel, its revenue reached NIS 10.8 million, but it posted a loss of NIS 17 million, among other things because of the construction of its production facility, which gives some indication of the cost involved in that.

Bazelet Pharma has established itself as a distribution and service company in the cannabis industry, and before the reform it was the distributor for Seàch, Canndoc, IMC, and Better Cannabis, accounting for one third of the Israeli market. Bazelet also dealt in extraction for these companies, and in 2017 began setting up its new facility.

The company currently collaborates with Alvit LCS Pharma, which is about to merge its cannabis activity into listed company Tefen, on research and development for unique cannabis strains. For the purposes of setting up its facility, Bazelet received a loan, convertible to equity, from the Peninsula Fund, and it will become a significant player in distribution as well, alongside Cann10, Rafa, and BOL.

A few TASE-listed cannabis companies said that they were interested in setting up cannabis processing factories. One of them has a relative advantage in this – CannAssure, which merged with stock exchange shell Direct Capital, is converting an existing factory for processing food supplements (which formerly belonged to Solbar Industries Ltd. (TASE: SLBR)) to medical cannabis.

Both the cannabis growing companies and companies that process cannabis are likely to succeed in creating differentiation in the market and become leading players overseas, even before they export. Tikun Olam has already demonstrated how an agricultural company that manages to brand its unique strains and growing methods can create partnerships with overseas growers. This know-how is worth percentages of a company and royalties, provided that the company does succeed in showing that it is unique. Many Israeli companies now offer knowledge and expertise of “Israeli cannabis” overseas, and the world is sympathetic, but not all of the companies have experts with the same degree of experience in growing high-quality medical cannabis. Not every company with connections to patients has derived information of the same quality from it – information about matching strains to diseases, about the side effects of strains and suitability for personal preferences, etc.

The processing companies are attractive because if exports from Israel are permitted, they will be in the forefront, the final station before the material is sent out. As of now, however, it appears that exports have been suspended for political reasons that no one has gotten to the bottom of, and there is therefore also no way of predicting if or when this bottleneck will be released. In such a situation, the operating companies will be interested in the global market only if they can assemble unique knowledge about cannabis production, as Panaxia is doing.

Software companies: Unrealized potential

Israel has “pure” software companies in the cannabis field, but it appears that this category has not yet developed as it could have in the Israeli ecosystem. Software activity can be relevant to matching cannabis strains to specific diseases, managing information about patients, researching the distinguishing effect of various materials within the plant, and to its genetic research.

Unsurprisingly, the companies in this sector include one founded by the former CEO of Compugen Ltd. (Nasdaq: CGEN; TASE: CGEN) and Evogene Ltd. (TASE:EVGN), the leading big data biology companies in Israel. The company is NRGene and the founder is Dr. Gil Ronen. NRGene deals with genomics of a variety of agricultural plants and animals. In the cannabis sector, it has already signed a number of cooperation deals with growers in Israel, Europe, and the US, which hope to develop cannabis strains with genes whose superiority has been demonstrated by software. NRGene’s main activity is still in non-cannabis agriculture.

Another prominent company is Cannabis Mercantile Trading Exchange (CMTREX), which developed a cannabis trading platform. The company’s founder and CEO, Saul Singer (not the founder of Start Up Nation Central), worked with software and tools for the diamond market, and built a leading commercial platform for the sector. He is now transferring the knowledge to another difficult-to-commercialize product. The company recently launched its first product.

Drug delivery companies: The veterans have not yet taken up cannabis

Over the years, Israeli drug companies have developed expertise in drug delivery, which they are now applying to the cannabis sector. Intec is a good example. It developed the accordion pill that releases fixed dosages of active ingredients upon entering the intestine. Releasing the material in the intestine has special effects on both the probability that the material will be absorbed and the ability to control the dosage. Intec initially thought about going into the cannabis sector – it develops conventional drugs and is about to complete a clinical trials of its drug for Parkinson’s Disease – but cannabis was an opportunity for a company whose entry into the market is being delayed to develop a product that could rapidly contribute value to it and its share. Intec’s share indeed rose 14% on the day it announced that it was entering the cannabis field. The company recent completed Phase I trials of cannabis elements for treatment of pain.

Biota, founded at the Technion, Israel Institute of Technology, has worked for two decades in creating alginates used to deliver drugs on the tongue. The company, which conducted trials for years without attracting attention or reaching the market, recently began also developing cannabis products. Alginates are designed to reduce aftertaste, increase absorption speed, and reduce the amount of material in the liver.

Most of the well-known Israel drug delivery companies (e.g. NeuroDerm, Sol-Gel, Foamix Pharmaceuticals Ltd. (Nasdaq: FOMX), PolyPid) have not yet made a move towards cannabis. Most of the companies operating in this category were founded by parties outside the pharma industry. The following are some of the most prominent.

Syqe Medical is one of the few startups in cannabis accessories to raise a substantial amount of capital. It develops a special inhaler that provides a fixed dosage of the material. The company has an agreement with Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), which distributes its products in hospitals. It has raised $32 million to date.

Brainose Technologies is a new company founded by Shizim and Nextar Chempharma Solutions, both of which have founded incubators. Brainose develops a new method of delivering cannabis molecules by sniffing through the nose. The V4-Twenty company markets vaporizing products marketed online described by users as “discrete and tailor-made,” in other words, designed mainly for the recreational cannabis market, not the medical one.

Trichome Shell developed technology for producing quasi-toothpicks made exclusively from active cannabis ingredients. The toothpick can be put into a cigarette and smoked. The technology for producing the toothpick can be exported, even if the product itself cannot.

Pharma companies: Easy to start trials

Several companies are developing specific cannabis ingredients into a drug, but a drug has a long and expensive road to travel before it reaches the market, so most investors stay clear of this. At the same time, the sale several weeks ago of Therapix Biosciences (Nasdaq: TRPX), which develops a product for treatment of Tourette Syndrome (TS), for $48 milion shows that cannabinoid magic can also work in this sphere.

The advantage of cannabis over other drugs is that cannabis ingredients can be put into clinical trials more easily, without going through safety trials. It is particularly easy to reach human trials for cannabis in Israel, which is therefore developing an advantage in this sector.

CannRX, a subsidiary of Izun Pharma, located on Har Hahotzvim in Jerusalem, was founded for the purpose of “medicizing” herbal medicine. It recently completed Phase II clinical trials of a product for treatment of the mouth sores of cancer patients. CannRX applies its parent company’s capabilities in mapping the precise composition of the plant and its special extraction methods. CannRX hopes to develop cannabis products that will gain adherents in the health system.

Lumir Lab, a laboratory founded this year in order to estimate the quantities of the various ingredients in a plant for research purposes, has agreed on its first cooperation with Gynica, another Israeli company developing cannabis-based products for women’s health. The company also develops a product named Anandamide – an ingredient found in the cannabis plant that operates receptors in the brain for cannabis.

Cannabics developed a cannabis extract that the company is considering for cancer treatment. The extract showed activity of these ingredients against cancer cells in the laboratory.

Alvit Medical, founded five years ago, developed formulations for medical cannabis (tablets, suppositories, sprays, etc.). It is now merging cannabis growing and production into a stock exchange shell under its control. The idea is for the cannabis unit to operate independently in researching and developing its products. The company recently signed a cooperation agreement for researching and developing products with Bazelet. The companies’ joint products, which will be produced in Bazelet’s new factory, are projected to reach the market in 2019.

GemmaCert can also be included in the pharma category. The company, which develops a home kit for the small grower to test the active ingredients content of a plant, has already raised $5.3 million. Its products are currently marketed to the home market; it is possible that greater precision will be needed in the medical cannabis market. The company was founded on the basis of technology developed by Oded Shoseyov at Hebrew University.

Education and research: Knowledge converted to cannabis

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Shizim, a multidisciplinary medical group has a subcontracting company for clinical trials by other companies and by its own companies, founded in its incubator, which is not part of the Israel Innovation Authority’s network of incubators. The group also trains medical executives in both Israel and Poland. Shizim is now trying to apply this approach to the cannabis sector.

It began in training and study, as it also did in the medical sector to some extent. Cann10, one of the group’s companies, started the first training course for developing cannabis products with Technion. Initially, this respectable institution hesitated to enter this sphere, but cannabis became one of its most sought after degree tracks. This model of a degree course and international conference is now being reproduced by Cann10 in other countries.

The company also has a technology incubator in the cannabis field, and wants to establish an incubator outside Israel. It is conducting studies in the sector, and this year launched Cannarit, its own cannabis brand sold at pharmacies. In order to close a circle, the company is now building its own cannabis-growing site.

Another important company that came from the knowledge field and expanded its activity to incubators is Nextar, managed by chairperson and CEO Dr. Orna Dreazen. The company, which develops formulations for drug companies, is in an ideal position to specialize in development of reproducible and effective formulations in the cannabis-based ingredients field. Nextar founded Nextage Innovation, an incubator for cannabis startups interested in getting help from its analytic capabilities and capabilities in building chemical compounds. The incubator has already received its first investment from an Australian concern.

Another concern, iCAN, was founded by CEO Saul Kaye, a partner in several international and Israeli cannabis companies, for the purpose of giving cannabis companies consultation and related services, such as business intelligence and market research, negotiating with potential investors, and formulations and clinical trials services. The company also holds an international conference, and has substantial holdings in two startups: CannRX in the formulations segment and Steep Hill in laboratory testing.

Which Israeli companies will succeed cannot be predicted at present: not those developing cannabis-based products, nor those making products tangential to the market, such as manufacturers of accessories for cannabis growing, nor developers of drug delivery systems, nor providers of other services. In the short term, the first group will reach a market with strong demand. In the long term, however, it will be difficult to generate differentiation in it. The second group can already export now, but it is by no means sure that profits on their products will continue to be high just because they are linked to the cannabis industry. Those who succeed in creating something unique in the market – special molecules, delivery systems with added value that cannot be easily imitated, truly unique knowledge about the connection between the plant’s composition and its effect on various diseases – will probably be the ones to stand out in the future cannabis market. Meanwhile, money available for investment in the market is plentiful at the moment.

Published by Globes, Israel business news – en.globes.co.il – on November 19, 2018